Twitter Inc.'s Lousy Earnings Dropped a Fail Whale on Investors Today

Twitter (NYSE: TWTR) investors may now understand why "second place is often just the first loser," according to the adage often attributed to Dale EarnhardtSr. The second-largest social network's stock fell through the floor in after-hours trading last night as the market digested Twitter's fourth-quarter earnings, which were actually better than projected, and its latest user statistics, which were weaker than expected.

Twitter's fourth-quarter earnings report showed revenue of $242.7 million and adjusted earnings of $0.02 per share, better than the loss of $0.02 per share on $217.8 million in revenue that Wall Street had expected. That wasn't what investors keyed on, though: Twitter's user growth, which is so important to its long-term future as a legitimate Facebook (NASDAQ: FB) competitor, appears to be slowing down in a big way. Its tally of global monthly active users (MAUs) grew by only nine million, and MAUs in the United States only increased by one million:

But Twitter did manage to beat expectations in financial terms, which should be somewhat of a positive. Still, that might not be such a great starting point, either, as unlike Facebook, Twitter has yet to generate either a GAAP profit or positive free cash flow:

Sources: Twitter S-1 and quarterly earnings report

Part of the reason why Twitter has such a hard time getting to profitability is because it spends everything on R&D. Now, this might not be a bad thing if the company was investing in its future through exciting new products and technologies -- but what products and technologies would those be? Facebook's never spent much more than a quarter of its revenue on R&D in any given year. In fact, Twitter's reported annual R&D expense of $594 million is 42% of what Facebook spent on R&D last year, but Facebook generated nearly 12 times Twitter's revenue. Can you name a single interesting or notable new thing that Twitter rolled out last year? Tweaking the way the website works doesn't count. You could have built a new Obamacare website from the ground up with the money Twitter spent on R&D last year.

Here are a few other data points from Twitter's earnings and its forward guidance, with Facebook's numbers for comparison:

Twitter generated $1.01 in average revenue per user (ARPU) for the fourth quarter.

Twitter's ARPU was roughly $2.76 for all of 2013.

Facebook's ARPU was $2.10 for the fourth quarter and $5.68 for the full year.

Twitter spent $1.31 per user on sales and marketing in 2013.

Facebook spent $0.81 per user on sales and marketing in 2013.

Twitter expects between $1.15 and $1.20 billion in revenue for 2014.

Facebook generated $777 million in revenue when it had 360 million MAUs (in 2009).

Twitter expects 2014 "adjusted EBITDA" to be between $150 million and $180 million.

Facebook's GAAP net income was $229 million on $777 million in revenue.

Twitter expects to spend between $330 million to $390 million on capital expenditures in 2014.

Facebook spent $33 million on capital expenditures when it had $777 million in revenue.

If this doesn't drive home the point that second place is just the first loser when it comes to social networks, maybe this graph will help:

Sources: Twitter and Facebook S-1s and quarterly reports

Twitter is growing less quickly than Facebook, it's spending money less intelligently, and it's generating less money per user to begin with. In what universe should it be worth almost a fifth of Facebook, when it can't even make a fifth as much profit as Facebook, when it has a fifth of Facebook's users?

Don't chase after second place -- go for investing gold!The one sure way to get wealthy is to invest in a groundbreaking company that goes on to dominate a multibillion-dollar industry. Our analysts have done it before with the likes of Amazon and Netflix. And now they think they've done it again with three stock picks that they believe could generate the same type of phenomenal returns. They've revealed these picks in a new free report that you can download instantly by clicking here now.

Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter @TMFBiggles for more insight into markets, history, and technology.

The Motley Fool recommends Amazon.com, Netflix, Facebook, and Twitter. The Motley Fool owns shares of Amazon.com, Netflix, and Facebook. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment icon found on every comment.

What the… TWTR is down from its exorbitant valuation?? Hard to imagine a quarterly loss of $511M from a company that chalked up revenues of $243M (beating analysts estimates!?); and why projected revenues for next quarter of only $230M to $240M – my math says that is a decrease in revenue, quarter over quarter? Stock is down nearly $12/share after the close: I wonder how much farther it drops between now and Feb 15th, when insiders are allowed to cash out – greatly diluting this stock. I guess it’s time for me to take my gains now and sell, long before it hits $30 or $32/share, as many of the analysts predict.

Twitter was a trap and anyone that didn't get out was taken. Out of the 550 Million shares only 70 mil were released, that Is roughly 13% of the company while the rest in were in lock ups. Any investing company with a lot of money can buy up those shares and lift the price and your average Joe invests seeing the stock go up and buys into the impossible. Some analyst probably were paid off and part-took in the game raising targets to $75. That's just crazy for a company that doesn't generate any profit. What a joke, I feel bad for the public that bought into wall street game. its corrupt and sad. No problem selling it off when the stock went down 25%, where is the belief of a bright future the media preached? They say user growth killed the stock, the company been declining users for a while, how should that be a surprise? The conspiracy is that big time players with big time money had control of this one and waited to see if they can lift it up more, but decided to cash out. Had nothing to do with the actual company in my mind